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If Death is Simple, Why is Life Insurance Complicated?

Written by Aaron Pinkston, Wed, May 05 2010

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I probably don’t write enough about death. For a site that is all about life insurance and life insurance quotes, I recognize the issue of death is a subtext. The problem is that death (or at least its timing) is the reason for life insurance.

Yes, it’s often been joked that it should be called “death insurance” instead of “life insurance” because you are insuring against early death, not your continued life – that would be a longevity risk. At some point in time, I suspect before they thought logically about what to call different types of insurance, someone called it “life insurance” and the name stuck.

We all know what we’re talking about. When you die, and you policy is in force, the beneficiary you name gets the death benefit paid from the policy.

The trick to life insurance is:

  1. You need to die.
  2. Your policy needs to be in force when you die.
  3. The money is paid directly to your beneficiary. Your will usually has no bearing on this, unless all your beneficiaries are invalid or deceased.

Why does life insurance get complicated?

It seems pretty simple, but sometimes life insurance gets complicated. For instance, some insurance sales people like to suggest that because your life insurance needs to be in place when you die to collect the death benefit that life insurance has no value unless it will last your whole lifetime.

That’s not entirely true. The risk most people hedge with life insurance is not death. Instead, most people hedge premature death. There’s a difference.

Displacing the financial risk of premature death has a lot of value for millions of people, even if they eventually die without life insurance. The reason is because most people are certain if they can travel their life path into their 60’s, 70’s, or beyond, they will be able to achieve their financial goals. In the mean time, if they die in their 30’s, they may still have income obligations to their kids; if they die in their 50’s they may have retirement obligations to their spouse or partner.

Being able to fulfill those obligations, whether you are physically present or not, is the value of temporary life insurance.

Get term life quotes – maybe

Some people may say, ‘Great, so you suggest term insurance.’ And the truth is I don’t.

I’m not going to say term insurance is the answer for two reasons:

  1. Some people still have financial risks they need to hedge in case of death. This could any number of things like tax planning, charitable giving, or needing to make sure they leave a legacy for a special needs child.
  2. “Term insurance” is a technical word for a particular type of life insurance. If you fill your need for temporary life insurance by searching only for term, you may be missing opportunities that fit your needs better.

The debate between term and whole life insurance sounds like a simple one to most people shopping for life insurance. But to people in the know, it is much more complicated than that. In fact, most people familiar with the industry want to correct the terminology we commonly use to frame the debate – it’s already getting complicated.

Rather than taking a stance on what type of product is best for particular situations and entering an unnecessary technical debate, Clarifinancial lets you define your goals and pick the best customized solution without all the salesy talk. But Clarifinancial doesn’t sell insurance and has no interest in what option you ultimately choose, keeping us objective.

To any agents, brokers, wholesalers, financial writers or analysts who read this: Yes, we leave out another component of some types of life insurance many experts believe is important. But until we get an email from a consumer asking to include this type of comparison, I’ll consider it irrelevant to their true concerns. Our goal is to clarify, not confuse.

Protecting your family should be easy

Life insurance is about the financial loss of those around you when you die. You will die. You don’t know when. If it happens sooner than you thought, this can create a large financial burden on those you love. Adding financial insult to emotional injury is an easy and cheap thing to avoid. One way is to show them you care enough to think about their future.

So while I don’t write a lot about death and its relationship to life insurance, I don’t mean to. If death came on a schedule, there would be no reason to buy life insurance for many people.

Fortunately, if you are looking for life insurance quotes, you can define your goals, answer a few questions, and then compare custom quotes from multiple agents without any sales pressure right here. That’s the best way I know of to do it. Let me know if you find something better.